You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs.The firm produces and sells a given output.If w = $40,r = $100,MP_L = 20,and MP_K = 40 the firm: A) is cost minimizing. B) should use less L and more K to cost minimize. C) should use more L and less K to cost minimize. D) is profit maximizing but not cost minimizing.

Question

Quizplus · Accepted Answer

The firm should use more L and less K because the ratio of marginal products to input prices (MP_L/w and MP_K/r) is not equal. MP_L/w = 20/40 = 0.5 and MP_K/r = 40/100 = 0.4. To minimize costs, these ratios should be equal, suggesting more L and less K should be used.

You Are an Efficiency Expert Hired by a Manufacturing Firm